Guess what? Fairy tales don't come true.

The penny finally seems to be dropping amongst the right that the miracle they were hoping for in their fairytale view of the economy is not going to happen.

Recall that they justified government austerity on the basis this would encourage the private sector to start borrowing and spending again. Those who pointed out that the government deficit was a direct result of the private sector trying to pay down their enormous debts were ignored and accused of being irresponsible. Really? When the private sector diverts its income from spending to saving demand drops and the economy goes into recession. This automatically reduces tax revenues and increases government spending on unemployment benefits. This increases the deficit. In fact the deficit is essential because it is a simple accounting fact that the aggregated private sector can only save if the government runs a deficit. If the government tries to cut the deficit at this stage it prevents the private sector from saving by reducing their income. When your income goes down you have to choose between cutting your spending or increasing your borrowing. The miracle that the conservatives seem to expect is for the aggregated private sector to increase their borrowing when their income is dropping. Are they seriously expecting individuals and companies to take on more loans when their income is dropping? Don't they realise that this would be idiotically irresponsible? Nevertheless they press ahead trying to persuade us all to recklessly increase our debts back to the record levels that preceded and caused the global financial crisis.

There is some evidence that they are thinking about trying what those who understand economic reality have been pleading for. For the government to use its unique ability create money to enable the private sector to reduce its debts whilst maintaining spending. This will enable growth and saving.

The problem is how do they increase the deficit now without admitting they were wrong about austerity in the first place. The answer seems to be that they will claim that the because of austerity the government now has the credibility to borrow at a super low rate and they will use this money responsibly for investment in infrastructure etc. This is nonsense of course. The reason UK government bond rates are low is because the market knows that a currency-issuing government can never go broke. For example the Bank of England can and will simply create money to purchase the bonds, keeping the interest rates at any interest rate that they choose.

While I am grateful for the change of heart I am wary of this type of 'investment'. When government embark on big spending plans money tends to be wasted. Worse it get diverted to private companies adept at lobbying. It is called crony capitalism. Surely Conservatives of all people should prefer that the free market determines where this injection of money is spent?

The best way to do this is to cut taxes, especially regressive taxes like VAT. That would immediately inject demand into the economy and automatically ensure that growth occurs in areas where demand is greatest. They should also immediately put on hold any cuts in spending on valuable public services like education and health. Any increases in spending should be gradual and should aim at maximising the productive capacity of the economy and minimising environmental damage. Common sense really.